During last quarter's conference call for Intuitive Surgical (NASDAQ:ISRG), a funny thing happened. Analyst Robert Adam Hopkins asked Intuitive CEO Dr. Gary Guthart about the company's "eye-popping" amount of cash on the balance sheet.
Guthart responded that the company is looking to reinvest that cash back into the business, explore potential mergers/acquisitions, consider buying back company stock, or [gasp] pay a dividend. For a fast-growing tech company in the healthcare field, paying a dividend would seem odd, but Intuitive's rapidly growing cash balance doesn't lie -- the company has been minting money.
To me, reinvesting in the business and paying a dividend make the most sense for Intuitive. While there certainly are smaller acquisitions that could help the company out, large splashes in the M&A pool rarely ends up being good for shareholders. And with the stock trading for 40 times earnings, buybacks don't make much sense, either.
How much could Intuitive afford to pay out?
Of course, cash alone isn't enough to pay a dividend. A company needs to have strong free cash flow (FCF) to pay its shareholders. Here's what Intuitive's FCF has looked like since 2007.
As you might have seen with Intuitive's cash hoard, the company was hurt in 2013 and 2014 when the Affordable Care Act went into affect, and hospitals began to tighten their purse strings. Since then, however, they have flocked to the company's new Xi machine, and the number of operations in U.S. General Surgery has boomed -- creating lots more cash flow for the company.
If Intuitive were to start paying a dividend, the management likely wouldn't go beyond a payout that ate up 50% of the company's FCF. That equates to about $426 million right now -- which is equal to $11.07 per share. Given today's price tag, that's a 1.54% dividend yield.
Such a yield isn't enormous, but it's important to take the long view. As Intuitive's installed base of machines grows, it is recurring revenue -- the disposable parts that surgeons must order for each operation -- that will provide the lion's share of sales. These offerings have higher margins than machine sales alone, similar to a razors and blades model.
Of course, the daVinci will have to continue proving its usefulness in evermore procedures to drive recurring revenue growth. It has already done that with hernia operations, and it hopes to make headway with colorectal and thoracic procedures, as well. If the company succeeds in these endeavors, FCF should experience a steady rise, meaning even higher payouts in the future.
Of course, I wouldn't suggest an investor buy Intuitive Surgical today just for the possibility of a dividend payment. But it's something that current shareholders should keep their eyes on, as it would be an excellent kicker for a solid investment.
Brian Stoffel owns shares of Intuitive Surgical. The Motley Fool owns shares of and recommends Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.